Dropping interest rates - who is the beneficiary?

If elevated interest rates were the only impediment in the way of private sector development and its appetite for credit, the countrys industry would have traversed a long way since the discount rate reductions kicked in.
Since August FY12 to-date, Pakistan economy hasn witnessed any rate hike. Discount rate has shaved off 450 basis points over the past 18 months, mainly on the pretext of spurring private sector growth to bolster the lethargic GDP growth.
However, despite repeated reductions in the policy rate, private sector credit offtake continues its sorry tale.
Comparing the 1HFY13 with similar periods of the previous two fiscal years, highlights that loans to private sector have been creeping. The tally grew by 19 percent YoY to reach Rs193.5 billion in 1HFY12, but tapered off again, dropping around 46 percent in 1HFY13.
The 19 percent jump witnessed in private sector credit offtake in Jul-Dec 2012 provided the economy with no reason to cheer as the major chunk of these loans went to non-financial public sector enterprises, simply to temporarily loosen the noose of liquidity crunch.
Another factor that buttressed the private sector credit in 1HFY12 was banks lending to NBFCs specially the mutual funds which in-turn largely invest the borrowed funds in the government securities. Thus all-in-all the loans to private sector businesses shriveled by 55 percent in 1HFY12.
To put things into perspective, the banks readjust their lending rates after every policy announcement. Thus, the impact of any change in the discount rate becomes evident in 16 - 18 months. Since SBP has been easing its tight monetary policy since 1QFY12, a great deal of progress was expected on the private sector credit front in FY13. However, to our utter dismay, it posted a YoY decline of 46 percent in 1HFY13.
Talking about the credit disbursement to private sector businesses, it posted a YoY growth of 80 percent in 1HFY13. But wait, don get excited! This boost in credit flow to the private sector doesn signify any expansion. Working capital financing drove more than 83 percent of this growth in private sector credit offtake. Moreover, textile sector remained the major growth propeller, while the other sectors stay in the lurch.
The question that now pinches is, why the low cost of capital is not doing any good to the private sector? Many say that it is the lingering energy crisis and the worsening writ of law and order in the country that has tamed the capacity utilisation of the private sector leading to their subdued credit craving.
However, this alone is not the reason. There is lethargy on banking front too. Banks have undergone a shift in their balance sheet composition for quite some time now with a bias towards parking their funds in government securities. This not only provides banks with a risk-free return but also guns down non-performing loans and bad debts.
Besides the governments never-ending credit appetite which is grabbing the banking sectors attention, the lending prudence as specified by the SBP and the implementation of Basel-II prevent the banks from lending to SMEs and sole proprietors, despite their appetite for the bank credit. This not only hampers the private sector growth but also propel the expansion of informal lending activities, rendering monetary policy decisions further irrelevant in the long-run.
All-things-considered, the low interest rate phenomenon doesn appear to be significantly beneficial for the private sector due to myriad exogenous factors which also shadowed the FDI flows in the country despite low cost of capital.
With subdued private sector growth and weeping FDI, the only entity which appears to be enjoying the downward ride of the monetary rollercoaster is the government - the irrational borrower, whose hunger doesn seem to be satiatiable in the absence of an efficient tax collection system and the next round of IMF Programme.